A New Danger Courtesy of the Government?

For months, we had pointed out the very large, two year negative divergence
that the Financials had relative to the S&P 500. As discussed, the importance
of this was that the Financial Sector represented 14% of the S&P's component
structure.

And yet, the S&P went up for two years while the Financials went down
for two years. We had commented that when conditions get too far out of sync,
equilibrium is always re-established ... it is only a matter of time. See today's
chart below ...

So, why are we bringing this topic up today?

It is because Governmental actions may have a self-destruction wish.
Let me explain ...

Institutional Investors were starting to panic yesterday. They realize how
bad the banking system is and how difficult it is for them to make a profit
when interest rates are very low. (The Banking Index's two year drop could
be suggesting that a more serious problem is around the corner .. see the chart
below.)

So, our government should respect this potentially destructive state of
Banking weakness, and NOT inject any new stress elements into the Banking arena.
But, instead of that happening, Institutional Investors were starting to panic
yesterday because the government appeared ready to do the opposite.

How so? Apparently, the U.S. Federal Housing Finance Agency
has been planning to sue the nation's largest banks for approximately 30 Billion
Dollars. The idea is to recoup money for Fannie Mae and Freddie Mac. Such a
protracted legal event could easily overhang in the banks and markets for two
plus years.

If in one's wildest dream, the FHA could find the WORSE timing for
such a thing ... this would be it. But, sometimes a personal bias interferes
with clear thinking with a disregard for the best long term solution.

Could it be ... that the FHA is looking at this as a possible funding source
for the much discussed "underwater mortgage program"? We are referring to the
refinancing program being discussed that would help homeowners who owe more
on their home than the house is currently worth.

Take a moment to look at today's chart, and you will see the precarious position
that the Banking index is still in.

It is possible ... that if the FHA does launch a lawsuit, that the
Banking Index will have another leg down and that would have serious repercussions
on the stock market. The FHA has until the end of the day on Tuesday
to file a lawsuit ... so keep an alert eye out for what happens.

Marty Chenard is an Advanced Stock Market Technical Analyst that has developed
his own proprietary analytical tools and stock market models. As a result,
he was out of the market two weeks before the 1987 Crash in the most recent
Bear Market he faxed his Members in March 2000 telling them all to SELL. He
is an advanced technical analyst and not an investment advisor, nor a securities
broker.

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